July 2023

Sticky Leverage: Comment

Andrea Ajello, Ander Perez-Orive, and Bálint Szőke

Abstract:

We revisit the role of long-term nominal corporate debt for the transmission of inflation shocks in the general equilibrium model of Gomes, Jermann, and Schmid (2016, henceforth GJS). We show that inaccuracies in the model solution and calibration strategy lead GJS to a model equilibrium in which nominal long-term debt is systematically mispriced. As a result, the quantitative importance of corporate leverage in the transmission of inflation shocks to real activity in their framework is 6 times larger than what arises under the rational expectations equilibrium.

Keywords: Corporate leverage, Debt overhang, Generalized Euler equation, Nominal long-term debt

DOI: https://doi.org/10.17016/FEDS.2023.051

PDF: Full Paper

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Last Update: July 31, 2023